Matter of Henady

• Decision Date: 29 March 1994
• Docket Number: Bankruptcy No. 93-40491.
• Citation: 165 BR 887
• Parties: In the Matter of Deborah Anne HENADY, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

165 B.R. 887 (1994)

In the Matter of Deborah Anne HENADY, Debtor.

Bankruptcy No. 93-40491.

United States Bankruptcy Court, N.D. Indiana, Hammond Division at Lafayette.

March 29, 1994.

Margret Robb, Lafayette, IN, Trustee.

Dennis Woods, Fowler, IN, for debtor.

DECISION

ROBERT E. GRANT, Bankruptcy Judge.

Deborah Anne Henady filed a petition for relief under Chapter 7 of the United States Bankruptcy Code on July 30, 1993. The scheduled assets include a claim against her ex-husband in the amount of $22,000.00. This claim arises out of his failure to pay weekly support and various health care expenses for their children, as ordered by the Newton Circuit Court. On Schedule C, debtor claimed an exemption in this asset, in the amount of $22,000.00, pursuant to I.C. XX-X-XX-X.

This matter is before the court as the result of the bankruptcy trustee's objection to debtor's claimed exemption. As the dispute has evolved, it no longer centers upon the question of the claimed exemption. Instead, the ultimate issue has become whether debtor's claim against her ex-husband is property of the bankruptcy estate. See Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991) ("No property can be exempted (and thereby immunized), however, unless it first falls within the bankruptcy estate.") (emphasis in original). See also Matter of Yonikus, 996 F.2d 866, 869 (7th Cir.1993) ("Before an exemption can be claimed, it must be estate property."). Where the original exemption issue is concerned, the parties have stipulated that, if the claim for support arrearages is property of the estate, the debtor's exemption is limited to the $100.00 exemption Indiana law permits for intangible property. See I.C. XX-X-XX-X(a)(3). The matter has been submitted to the court for a decision based upon the parties' stipulation of facts and the briefs of counsel.

Property of the bankruptcy estate is defined by § 541 of the United States Bankruptcy Code. The estate is initially comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case" wherever located and by whomever held. 11 U.S.C. § 541(a). Perhaps because of the breadth of this definition, other portions of § 541 operate to exclude certain interests of the debtor in property from the bankruptcy estate. The estate does not include property the debtor holds in trust for another. 11 U.S.C. § 541(d). See also Begier v. I.R.S., 496 U.S. 53, 59, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990); In re First Capital Mortgage Loan Corp., 917 F.2d 424, 426 (10th Cir.1990).

Absent any controlling federal interest, the nature of a debtor's interest in property is a matter of state law. Barnhill v. Johnson, ___ U.S. ___, ___, 112 S.Ct. 1386, 1389, 118 L.Ed.2d 39 (1992); Butner v. U.S., 440 U.S. 48, 54, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); Yonikus, 996 F.2d at 869; UNR Indus., Inc. v. Continental Casualty Co., 942 F.2d 1101, 1103 (7th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1586, 118 L.Ed.2d 305 (1992). See also In re B.I. Financial Servs. Group, Inc., 854 F.2d 351, 354 (9th Cir.1988); In re Cowles, 143 B.R. 5, 8 (Bankr.D.Mass.1992) (whether or not a trust exists is also a matter of state law). Debtor argues that under Indiana law she holds the right to collect the support arrearage as a trustee on behalf of her children. The trustee argues that, in Indiana, any amount in arrears is owed to the debtor personally, as reimbursement, and, thus, constitutes property of the estate.

The disparity in the parties' positions arises because the decisions of the Indiana courts are not consistent in their characterization of the capacity in which a custodial parent acts in connection with the collection of child support arrearages. When the issue is addressed in general terms, the courts readily speak of the custodial parent's fiduciary or trustee-like role. These broad statements break down, however, when the courts are called upon to apply them to more specific situations and, thus, are required to address the issue in greater detail.

The broader statements concerning the fiduciary role of the custodial parent have their origin in discussions concerning the parties' obligations with regard to ongoing or future support payments. Decrees for the payment of support do not create a debtor and creditor relationship between the custodial parent and the party obligated to pay. Pavuk v. Scheetz, 108 Ind.App. 494, 29 N.E.2d 992, 995 (1940). Although the custodial parent is the one entitled to receive these payments, it is the child, rather than the custodial parent, that is the intended beneficiary of a support order. Bendix v. Bendix, 550 N.E.2d 825, 826 (Ind.App.1990). The entity receiving the support is obligated to use it in support of the child. I.C. 31-111.5-14(b) ("The payments shall be used solely for the benefit of the child entitled to receive the payments."); Pavuk, 29 N.E.2d at 995 (custodial parent has duty to use support for the benefit of the child). Because of this duty, the custodial parent receives ongoing payments in a trustee or fiduciary-like capacity.¹Jenkins v. Jenkins, 567 N.E.2d 136, 140 (Ind.App.1991); In re Marriage of Honkomp, 178 Ind.App. 68, 69, 381 N.E.2d 881, 882 (1978). The custodial parent "becomes a trustee of the funds for the use and benefit of the child" and the noncustodial parent "becomes a debtor to the custodial parent trustee as the installments accrue." Grace v. Quigg, 150 Ind.App. 371, 378, 276 N.E.2d 594, 598 (1971).

A common scenario in which these general principles are put into operation involves a defense by the noncustodial parent to the custodial parent's efforts to collect past due child support, based upon the proposition that the parties had previously agreed that the court ordered support payments did not have to be made. See e.g. Ort v. Schage, 580 N.E.2d 335, 336 (Ind.App.1991); Pickett v. Pickett, 470 N.E.2d 751, 755 (Ind.App.1984); Grace, 276 N.E.2d at 599. The defense is uniquely unsuccessful. Little more is needed to defeat it than a reference to the custodial parent's trusteeship of the child's right to support, followed by the conclusion that the custodial parent has "no right to contract away the benefits of the trust." Grace, 276 N.E.2d at 599. Thus, "an agreement to forego child support is unenforceable because the parent has no right to contract away the child's support benefits." Ort, 580 N.E.2d at 336.

The concept of the custodial parent's role as a trustee is also frequently relied upon when the issue before the court is not whether there is a support arrearage but, rather, the amount of the arrears that must be paid. In this situation, the noncustodial parent attempts to reduce or eliminate its unpaid liability by asserting a right to set off amounts due it from the custodial parent against the otherwise unpaid support. Given the fiduciary role of the custodial parent, this argument also meets with little success.

Support allowances for the benefit of minor children are received by the custodial parent in a fiduciary-like capacity which does not permit a husband to "set off" support payments he owes against a debt owed him by his former wife in her individual capacity. Honkomp, 381 N.E.2d at 882.

The Indiana courts firmly adhere to the distinction between the custodial parent's trustee status as to support payments and that parent's individual status, regardless of the various permutations in which the set off argument may be presented. Thus, in State v. Funnell, 622 N.E.2d 189 (Ind.App.1993), where due to several changes in custody both parents had become entitled to support from the other, the trial court's decision allowing the father to set off his former wife's support arrearage against his own support arrears was reversed. The appellate court stated:

The trial court incorrectly treats the child support as an obligation from parent to parent. . . . Because the payor\'s obligation is to the child and not the custodial spouse, the payor cannot withhold support payments to set off a debt owed by the custodial spouse. . . . Funnell, 622 N.E.2d at 190 (citations omitted).

The court clarified that the mother owed her arrears to the father "in his capacity as trustee for the children. . . ." Funnell, 622 N.E.2d at 191 n. 6. Similarly, in Jenkins v. Jenkins, 567 N.E.2d 136 (Ind.App.1991), the noncustodial parent was not permitted to satisfy a debt he owed to his former wife, as a result of a property settlement, through a set off arising out of his overpayment of child support. The court held that "a debt in property settlement cannot be satisfied from a surplus in child support payments," Jenkins, 567 N.E.2d at 140, reasoning:

The custodial parent acts in a fiduciary capacity when receiving child support payments. . . . Although the money is paid to the custodial parent, that person is merely a conduit — the payor\'s obligation is to the child, not to the custodian.

* * * * * *

Because the role of a custodial parent receiving child support is that of trustee for the child\'s account, . . . it follows that the custodial parent may not appropriate funds from the child\'s account to satisfy any other debt. Jenkins, 567 N.E.2d at 140 (citations omitted).

Another aspect of the nature of support is presented by Carson v. Carson, 120 Ind.App. 1, 89 N.E.2d 555 (1950), where the court held that the custodial mother was entitled to collect all the child support payments ordered by the court, despite the fact that the child had entered the armed forces and she had not expended any funds on the child's behalf. The father argued that the son's entry into the armed forces relieved him of the obligation to pay, and that his ex-wife had to prove that she had actually expended the amounts she was seeking. The court rejected these arguments based upon the proposition that the money in question was for the benefit of the child, not the custodial parent.

The obligation under the

...